How Apple led an e-book price conspiracy—in the judge’s words

And why publishers accepted less money from Apple than from Amazon.

Earlier today, Apple lost a major case when District Judge Denise Cote ruled that the company led a conspiracy to raise e-book prices above those charged by Amazon. Cote's 160-page ruling, released this morning, offered some intricate detail on just how that conspiracy worked.

Cote described how Apple struck agreements with each of the five publisher defendants—who settled the case before trial—in order to push e-book rates higher than Amazon's. The negotiations happened in the seven weeks leading up to the January 27, 2010 announcement of the iPad.

Publishers told Apple they were unhappy with Amazon's standard price of $9.99. Although they received the full wholesale value of each book sold by Amazon, publishers didn't want $9.99 to catch on as the new default price for e-books, especially since this was so much lower than hardcovers. One strategy they used to keep revenues up was to delay the release of e-book versions of new books, but Apple told publishers it opposed this tactic in its then-forthcoming e-books store. HarperCollins wanted to flat-out charge as much as $18 or $20 for e-books, but Apple Senior VP Eddy Cue also made it clear that this was unrealistic. Apple was more amenable, however, when HarperCollins suggested using an "agency model" instead of the wholesale model used by Amazon.

With a wholesale model, Apple would purchase e-books and resell them at a price of its choosing, whereas with an agency model "a publisher sets the retail price and the retailer sells the e-book as its agent." Apple would become the agent selling the books, taking a 30 percent commission on each sale, just as it does with its App Store.

But Apple did not want to open an e-book store at all unless it was profitable, Cote wrote, and in order to make it work, the company had to deal with Amazon. Apple had even considered proposing a partnership with Amazon, "with iTunes acting as 'an e-book reseller exclusive to Amazon and Amazon becom[ing] an audio/video iTunes reseller exclusive to Apple,'" Cote wrote.

"Apple realized, however, that in handing over pricing decisions to the Publishers, it needed to restrain their desire to raise e-book prices sky high," Cote wrote. "It decided to require retail prices to be restrained by pricing tiers with caps. While Apple was willing to raise e-book prices by as much as 50 percent over Amazon’s $9.99, it did not want to be embarrassed by what it considered unrealistically high prices."

Most Favored Nations

The agency model (along with publisher-set but capped prices of $12.99 to $14.99) made it profitable enough for Apple to open its own e-book store—so long as Amazon's prices went up, too. Apple thus devised a Most Favored Nation (MFN) clause in its contracts with publishers which "guaranteed that the e-books in Apple’s e-bookstore would be sold for the lowest retail price available in the marketplace," Cote wrote. For the publishers to charge up to $14.99 for e-books on Apple's iBooks store, they had to raise prices on Amazon's Kindle store as well by collectively forcing Amazon to accept the agency model.

The MFN approach "eliminated any risk that Apple would ever have to compete on price when selling e-books, while as a practical matter forcing the Publishers to adopt the agency model across the board," the judge wrote.

Amazon, which had nearly 90 percent of the e-book market, resisted the publishers' demands to move to abandon the wholesale model. (Amazon apparently wanted to subsidize content prices, in part, so that it could move e-reader hardware and spur the adoption of e-books by mainstream users.) It retaliated against the demand by removing the "buy" button on Amazon's site for Macmillan books after Macmillan proposed a new agency model deal. Amazon also offered authors a “new 70 percent royalty option” for e-books with a list price “between $2.99 and $9.99," eliminating the middleman and giving authors higher profits.

Amazon could not stand firm for long, however, because the publishers all insisted on new terms more favorable to them. "Attempting to leverage its Apple negotiations to get a better deal with Amazon, HarperCollins included a proposed retail price for the majority of titles at either $12.99 or $14.99, but a commission of just 5 percent for Amazon," the judge's decision states. "HarperCollins then leveled its threat to Amazon. If Amazon declined its offer, HarperCollins would delay for six months the release of any e-book sold on a wholesale basis." Others publishers made similar proposals, but all insisted on agency.

Amazon Kindle Content VP Russell Grandinetti testified at trial that “[i]f it had been only Macmillan demanding agency, we would not have negotiated an agency contract with them. But having heard the same demand for agency terms coming from all the publishers in such close proximity... we really had no choice but to negotiate the best agency contracts we could with these five publishers.”

In Cote's view, this was nothing less than a concerted effort to raise prices—a conspiracy. She summarized Apple's responsibility for the whole situation this way:

A chief stumbling block to raising e-book prices was the Publishers’ fear that Amazon would retaliate against any Publisher who pressured it to raise prices. Each of them could also expect to lose substantial sales if they unilaterally raised the prices of their own e-books and none of their competitors followed suit. This is where Apple’s participation in the conspiracy proved essential. It assured each Publisher Defendant that it would only move forward if a critical mass of the major publishing houses agreed to its agency terms. It promised each Publisher Defendant that it was getting identical terms in its Agreement in every material way. It kept each Publisher Defendant apprised of how many others had agreed to execute Apple’s Agreements. As Cue acknowledged at trial, “I just wanted to assure them that they weren’t going to be alone, so that I would take the fear awa[y] of the Amazon retribution that they were all afraid of.” As a result, the Publisher Defendants understood that each of them shared the same set of risks and rewards.

Why publishers accepted less money from Apple

Somewhat counterintuitively, the agency agreements actually lowered the amount of money each publisher received per book. While wholesale agreements gave publishers about 50 percent of the hardcover list price on e-book sales, Apple's agency deals provided 70 percent of the final e-book retail price. This ended up being a significant cut in real dollars.

Cote explains:

[A] Publisher might receive $13 on a wholesale basis for an e-book sold by Amazon for $9.99, but (because of the MFN) only $7 from Apple so long as Amazon was still selling that e-book for $9.99. Even if Apple and Amazon were on the same agency arrangement with a Publisher, and that Publisher were able to move the retail price of the e-book to the top of the Apple price tier and sell it for $12.99, the Publisher would still receive less revenue under the agency model: $9.10 instead of the $13.00 in revenue under the wholesale model.

This chart from Cote's ruling illustrates the pricing and payment breakdowns:

Agreeing to agency models still suited the publishers' long-term interests because they wanted to "shift their industry to higher e-book prices to protect the prices of their physical books and the brick and mortar stores that sold those physical books," Cote wrote, adding that "[t]o change the price of e-books across the industry ... the Publishers would have to raise Amazon’s prices."

Random House, the largest publisher, resisted Apple's call to adopt the agency model in 2010. But the company capitulated a year later in order to get its books on the iPad.

"Apple decided to pressure Random House to join the iBookstore," Cote wrote. "As Cue wrote to Apple CEO Tim Cook, 'When we get Random House, it will be over for everyone.' Apple had its opportunity in the Fall of 2010, when Random House submitted some e-book apps to Apple’s App Store. Cue advised Random House that Apple was only interested in doing 'an overall deal' with Random House. By December, they had begun negotiations, and Random House executed an agency agreement with Apple in mid-January 2011. In an e-mail to [Steve] Jobs, Cue attributed Random House’s capitulation in part to 'the fact that I prevented an app from Random House from going live in the app store this week.'"

The switch to an agency model also impacted Google, which had plans for an Android e-book store of its own.

"Before January 2010, Google understood from its discussions with the Publisher Defendants that the parties would use the wholesale model to sell digital books. But, in January 2010, each of the Publisher Defendants did an about-face and suddenly advised Google that they were switching to an agency model and would no longer be offering books under wholesale terms," Cote wrote. "Google, like Amazon, would have preferred to use the wholesale model and set the retail prices for its e-books, but the Publisher Defendants refused to allow it that option."

Steve Jobs’ role in the conspiracy

When Steve Jobs announced the iPad in January 2010, he demonstrated purchasing a book from the iBookstore. Cote writes:

When asked by a reporter later that day why people would pay $14.99 in the iBookstore to purchase an e-book that was selling at Amazon for $9.99, Jobs told a reporter, “Well, that won’t be the case.” When the reporter sought to clarify, “You mean you won’t be $14.99 or they won’t be $9.99?” Jobs paused, and with a knowing nod responded, “The price will be the same” and explained that “Publishers are actually withholding their books from Amazon because they are not happy.”

With that statement, Jobs acknowledged his understanding that the Publisher Defendants would now wrest control of pricing from Amazon and raise e-book prices, and that Apple would not have to face any competition from Amazon on price.

The import of Jobs’s statement was obvious. On January 29, the General Counsel of S&S [Simon & Schuster] wrote to [Simon & Schuster CEO Carolyn] Reidy that she “cannot believe that Jobs made the statement” and considered it “[i]ncredibly stupid.”

Justice officials prosecuting the e-book case pointed to e-mails from Jobs demonstrating his role in pressuring the publishers. "Compelling evidence of Apple’s participation in the conspiracy came from the words uttered by Steve Jobs, Apple’s founder, CEO, and visionary," Cote wrote, then brought out the puns. "Apple has struggled mightily to reinterpret Jobs’s statements in a way that will eliminate their bite. Its efforts have proven fruitless."

Cote references e-mails Jobs sent to James Murdoch of News Corp., owner of HarperCollins. While Apple's agency model would pay publishers less per book than HarperCollins received from Amazon, Jobs told Murdoch that the anticipated iPad sales would make the model more than worth it. "We will sell more of our new devices than all of the Kindles ever sold during the first few weeks they are on sale," Jobs wrote. "If you stick with just Amazon, B&N, Sony, etc., you will likely be sitting on the sidelines of the mainstream e-book revolution."

Jobs urged Murdoch to "throw in with apple and see if we can all make a go of this to create a real mainstream e-books market at $12.99 and $14.99." The only other alternatives, Jobs wrote, were to "Keep going with Amazon at $9.99" or to "Hold back your books from Amazon," which would lead to piracy.

Enlarge/ A graph created by the US Department of Justice to show how e-book prices rose following the introduction of Apple's iBookstore.

Links in a chain

In its opening statement, Apple identified five "essential links" the plaintiffs had to establish to prove Apple led the conspiracy. These links, Cote wrote, were that the publishers signed Apple’s agency agreements with an MFN and price caps, that the MFN sharpened the publishers' incentives to demand agency agreements from Amazon, that the agency demands convinced Amazon of the futility of resistance, that Amazon agreed to agency deals in circumstances in which it would not have if not for the Apple MFN, and that publishers raised prices to the price caps as per the agreements with Apple.

"All of the 'links' that Apple identified in its opening statement were established at trial, and Apple did not argue otherwise in its summation," Cote wrote. "Apple similarly abandoned by summation its theory that Apple was unaware that the Publisher Defendants would use their new pricing authority to raise e-book prices; over the course of the trial, Apple’s witnesses admitted that they expected the Publisher Defendants to raise their e-book prices to Apple’s price caps."

DOJ Antitrust Division Chief Bill Baer applauded Cote's decision. “As the department’s litigation team established at trial, Apple executives hoped to ensure that its e-book business would be free from retail price competition, causing consumers throughout the country to pay higher prices for many e-books," Baer wrote. "The evidence showed that the prices of the conspiring publishers’ e-books increased by an average of 18 percent as a result of the collusive effort led by Apple. Companies cannot ignore the antitrust laws when they believe it is in their economic self-interest to do so. This decision by the court is a critical step in undoing the harm caused by Apple’s illegal actions."

As we noted in our earlier story, Apple already said it plans to appeal. "Apple did not conspire to fix e-book pricing," the company said. "When we introduced the iBookstore in 2010, we gave customers more choice, injecting much needed innovation and competition into the market, breaking Amazon's monopolistic grip on the publishing industry. We've done nothing wrong."

Promoted Comments

The accusation is collusion. Five publishers, which are supposed to be in competition with each other, instead agreed to raise prices in unison so customers would have no choice but to pay the extra five bucks a book, no matter what store they went to or what publisher they decided to buy from. They behaved as a cartel, with Apple as the ringleader.

Several commenters have stated Amazon requires its sellers to offer products (on the Amazonwebsite) at their lowest price.

I'm not sure this is actually the case. One of my suppliers (own website as well as Amazonreseller) shows a significant markup if you buy the product through Amazon as opposed tobuying it off their own website. Specific example: 8.52 versus 10.65.

General Pricing Rule: By our General Pricing rule, you must always ensure that the item price and total price of an item you list on Amazon.com are at or below the item price and total price at which you offer and/or sell the item via any other online sales channel.

To everyone going on and on about Amazon doing "the same thing" by insisting that all items sold through them must match the lowest price the seller sets elsewhere: That's not even remotely the same thing. Apple's not in trouble for insisting that they be given the best price, that's perfectly legal. Apple's in trouble for working with publishers to change what that "best price" was.

253 Reader Comments

[Steve] Jobs, Cue attributed Random House’s capitulation in part to 'the fact that I prevented an app from Random House from going live in the app store this week.'"

Im I hearing this right? apple prevented an app from going live because of another unrelated deal with eBook pricing?

Im really starting to wonder about apple's mobile store. Why, (as a developer) would I trust apple to be fair and impartial with my app when they have been found abusing there app store approval process?

One thing I kind of look at this as, is that the agreement to use agency model was basically making all ebook retailers unofficial company stores. It essentially let all of the retailers run distribution for the prices the publishers set, and essentially made amazon AND the apple bookstore nothing more than a re-skinned penguin.com.

Imagine the outrage is everyone else did that? Would Best Buy bother carrying Sony laptops if they weren't allowed to ever sell them for less than sonystyle.com? That would actually hurt the retailer who has to make room for products from other manufacturers, would make carrying a variety of products next to impossible, and eventually mean you had to buy anything from the manufacturer at exactly the price they want to sell it to you for.

Of course it only looks that way from the sheep perspective. Might want to look at why he is saying it instead of getting offensive to the term. there might be a good reason for it since a good portion of the American population gets lead around by corporations that have no business in the arena of trying to control public opinion. If sheep allow it, then they are sheep. simple as that. Get out from under the yoke so you can see a different perspective instead of shooting the messenger.

Wouldn't it be nice to return to a world where people say, "I'm sorry. I made a mistake and I'll see to it that I don't do it again."

Instead now we see posturing, hubris, and non-apologies because people/organizations feel entitled to conveniently ignore the truth when it suits them. And now, people/corporations can settle out of court without accepting responsibility or blame.

I'm not just speaking of Apple or the publishers, I see this with other organizations, politicians, and individuals. The lack of humbleness doesn't bode well for society.

Folks, take a stand and admit when you are wrong. It really won't kill you.

It's apple - they couldn't even do a simple statement of fact on their UK website over the Samsung copying issue.

That it happened to result in prices going up is fairly unimportant. The point is that it's not appropriate for one party to control prices in a market regardless of which direction it's pushing them. If there are some more subtle legal details in this case that add up to price fixing none of my readings have made sense of them.

On the other hand everyone I see responding fixates on the fact that Apple happened to drive up prices of E-Books. That's simply not important and ironically, as the article points out, despite the higher prices the publishers actually made LESS money. The point is that Amazon's monopoly took away their control, they wanted it back, and competition from Apple gave them that.

As far as I can see Amazon did not have a monopoly, there were several others selling ebooks before they ever got into the market. Sony being one of the largest. But even if they did have a monopoly, they did nothing to interfere with other sellers. Apple on the other hand, conspired with the publishers to control Amazon's market. That's what they are getting nailed for. The fact that the prices went up proves harm to both the consumer and to Amazon. Like Amazon or not, they never tried to dictate Apple's business practices like Apple did to Amazon.

Of course it only looks that way from the sheep perspective. Might want to look at why he is saying it instead of getting offensive to the term. there might be a good reason for it since a good portion of the American population gets lead around by corporations that have no business in the arena of trying to control public opinion. If sheep allow it, then they are sheep. simple as that. Get out from under the yoke so you can see a different perspective instead of shooting the messenger.

All that, huh? Sure. Lets go with Occam instead.

He said it because he just another bullshit spewing geek twit overstuffed with completely unfounded self importance.

Disastrous news for writers/smaller publishers who don't have books on the best-sellers list.

And i quote:

Quote:

“The Department of Justice has unwittingly caused further consolidation in the industry at a time when consolidation is not necessarily a good thing,” said Mark Coker, the chief executive of Smashwords, an e-book distributor. “If you want a vibrant ecosystem of multiple publishers, multiple publishing methods and multiple successful retailers in 5, 20 or 50 years, we took a step backwards this week.”

How is this disastrous news for writers and smaller publishers?

Apple seems to think that as do you but you guys have yet to explain what that even means. Writers will still get their same share of the pie they do now as they did then. etailers will still function as they did then as they do now; the only thing that's changed is they are now free to choose their retail price.

Mark Coker hasn't made an compelling argument; just stated a PR message, most likely just to get himself on the news rounds. And if he's a distributor, of course he's going to say that. he can no longer guarantee himself a fixed profit - he now has to compete.

Interesting how uber Apple blogger John Gruber snidely comments on the guilty verdict:

Quote:

Part of the evidence was this video shot by Kara Swisher of Steve Jobs speaking with Walt Mossberg in the hands-on press area after the introduction of the original iPad in 2010. Mossberg asks Jobs why someone would buy a book for $14.99 from the iBookstore when they could buy the same book from Amazon for $9.99.

" Jobs: Well, that won’t be the case.

Mossberg: Meaning you won’t be $14.99, or they won’t be $9.99?

Jobs (smiling): The prices will be the same. "

Judge Cote found that damning. No wonder Apple executives so seldom speak on the record.

So John, that's the reason, eh?

Jobs at the very least understood the market was going to head in that direction whether he gave the publisher the prices they wanted or not. I suspect he just let the time table advance to get his foot in the door instead of delaying the inevitable and being locked out. Despite the DOJ's assertions Apple isn't the ringleader. Despite the judge's assertions the price fixing was going to happen with or without Apple. Did Apple contribute to the issue... definitely. Did Apple cause it...definitely hot.

The problem was that Amazon had a monopoly on e-book sales, and they tried to use it to price out the competition, prompting the collusion between Apple and the publishers. All of that is anti-competitive behavior and per se illegal. Yes, Apple and the publishers deserved to be brought to court. But the fact that the DOJ didn't bring suit against Amazon was total BS. The court made the assumption that lower prices are better for consumers, even at the expense of competition--which would then allow Amazon to charge higher prices.

Interesting how uber Apple blogger John Gruber snidely comments on the guilty verdict:

Quote:

Part of the evidence was this video shot by Kara Swisher of Steve Jobs speaking with Walt Mossberg in the hands-on press area after the introduction of the original iPad in 2010. Mossberg asks Jobs why someone would buy a book for $14.99 from the iBookstore when they could buy the same book from Amazon for $9.99.

" Jobs: Well, that won’t be the case.

Mossberg: Meaning you won’t be $14.99, or they won’t be $9.99?

Jobs (smiling): The prices will be the same. "

Judge Cote found that damning. No wonder Apple executives so seldom speak on the record.

So John, that's the reason, eh?

Jobs at the very least understood the market was going to head in that direction whether he gave the publisher the prices they wanted or not. I suspect he just let the time table advance to get his foot in the door instead of delaying the inevitable and being locked out. Despite the DOJ's assertions Apple isn't the ringleader. Despite the judge's assertions the price fixing was going to happen with or without Apple. Did Apple contribute to the issue... definitely. Did Apple cause it...definitely hot.

inevitable how, what part of this are you still not understanding? they were absolutely determined to be the direct cause, because they enabled this price fixing to be possible. without control over such a majority of their sales, publishers would not be able to influence the market through apple in such a way, and would not be able to strongarm amazon into playing ball. it doesn't matter what they intended to do, apple was the one who acted on it. it's not rocket surgery, I don't see what you get out of trying to justify these business practices.

publishers are powerless to save this dying medium, so there's no reason for you to play the victim for them or anyone else. those who mess with market forces should be dealt with swiftly and efficiently. of course they would rather stop time and keep gouging you for eternity, your job as a consumer is to show them why this is impossible, and remind them who they're working for.

Any idea what will result from this? Will e-book prices go back down? Will Apple (and presumably the publishers in their out of court settlements) pay a large fine?

likely apple will be fined. how much is anyone's guess at this point.

as for ebook prices i am assuming they should start going down if not already since the publishers all took the government deal and paid their fines. but i havnt checked. this whole debacle put me off buying ebooks for the last year.

the last time i went to buy a book, they were ridiculously priced. went to my go to service, kobo, and found they too had jacked up their prices nearly across the board. one ebook i wanted was nearly $30. i could buy it at the book store for $20!!!

The problem was that Amazon had a monopoly on e-book sales, and they tried to use it to price out the competition, prompting the collusion between Apple and the publishers. All of that is anti-competitive behavior and per se illegal. Yes, Apple and the publishers deserved to be brought to court. But the fact that the DOJ didn't bring suit against Amazon was total BS. The court made the assumption that lower prices are better for consumers, even at the expense of competition--which would then allow Amazon to charge higher prices.

lower prices ARE better for consumers.

what you are insinuating is predatory pricing (extremely low prices ARE bad because they drive out competition, and then Amazon can raise prices to recoup loses)"at the expense of competition" - what competition are you talking about? amazon still has competition, it hasn't forced/destroyed any other ebook vendor

(if you are talking about amazon destroying a B&M competitior like Borders-> well, this is the free market in action - if innovation (electronic books) trumps old stuff (physical books), the old generation(Borders) needs to change, or they will die off)

What stands out in this case to me is the ease with which the deed was done! Imagine how difficult Apple's job would have been if there had been thousands of publishers to deal with instead of 5. Imagine how difficult it must be be for a writer now to negotiate a deal with a publisher now that there are only 5 who have the size and pull to get a work published. Once again, we have a case which screams out the evils of capitalism run amok. When markets are subverted by concentration, the consumer looses in almost every situation. Just look at the beer section of any large supermarket chain. Sort the beer by company... and weep... I for one like the new Amazon deal they have created for authors who want to bypass publishers. I have read a lot of good science fiction which would otherwise have ever seen the light of day (and a couple of stinkers... but for $1.99 I can live with "throwing it out"). I hope this model gains traction with all readers.

So from all of this, am I correct in thinking that the part that was illegal was this…

"Apple thus devised a Most Favored Nation (MFN) clause in its contracts with publishers which "guaranteed that the e-books in Apple’s e-bookstore would be sold for the lowest retail price available in the marketplace,"

It appears that everything else they did was ok, right?

I'm still not sure I understand how this was supposed to work in practice, considering that an iBook is often more expensive than the same book on Amazon. Is there some definition of "in the marketplace" that I'm missing here?

Maybe I'll get this wrong, but I'm trying to put this in easier terms to understand, for myself mostly.

Apple and Amazon both sell ebooks. Amazon want to speed the adoption of their ebook readers and, eventually, at this point, tablets, so they sell their ebooks at a lower price, making less of a profit, and encouraging people to read them on their Kindles. (They also sell their Kindles with little profit, but they use these to get people to buy stuff from their markets which is where they make money).

Publishers don't like that Amazon is selling the books at this price because people aren't buying their hardcover books, where they make a lot of their money.

Apple anticipates making a lot of money selling iPads, regardless of whether or not they sell books. They have a certain amount of profit they want to make on their ebooks, but they can't do this at the prices the publisher is charging for the books and the price Apple wants to sell them for. So, they get all the publishers together and they agree to put their books in pricing tiers and will pressure all other retailers to do the same. As long as they stay together, the publishers will make more money (less from Apple, but more from Amazon). Apple will sell books at the same price as Amazon and still maintain their profit margins, and Amazon will likely sell fewer Kindles and future tablets that will be advertised in their book store. It's a big win for Apple and the publishers. It effects Amazon's marketing strategy, but it's the consumer that really gets the shaft.

Do I have this right?This seems to be a cut and dry case of collusion. Government intervention is necessary in this situation to ensure the market remains competitive and the consumer is protected.

Maybe I'll get this wrong, but I'm trying to put this in easier terms to understand, for myself mostly.

Apple and Amazon both sell ebooks. Amazon want to speed the adoption of their ebook readers and, eventually, at this point, tablets, so they sell their ebooks at a lower price, making less of a profit, and encouraging people to read them on their Kindles. (They also sell their Kindles with little profit, but they use these to get people to buy stuff from their markets which is where they make money).

Publishers don't like that Amazon is selling the books at this price because people aren't buying their hardcover books, where they make a lot of their money.

Apple anticipates making a lot of money selling iPads, regardless of whether or not they sell books. They have a certain amount of profit they want to make on their ebooks, but they can't do this at the prices the publisher is charging for the books and the price Apple wants to sell them for. So, they get all the publishers together and they agree to put their books in pricing tiers and will pressure all other retailers to do the same. As long as they stay together, the publishers will make more money (less from Apple, but more from Amazon). Apple will sell books at the same price as Amazon and still maintain their profit margins, and Amazon will likely sell fewer Kindles and future tablets that will be advertised in their book store. It's a big win for Apple and the publishers. It effects Amazon's marketing strategy, but it's the consumer that really gets the shaft.

Do I have this right?This seems to be a cut and dry case of collusion. Government intervention is necessary in this situation to ensure the market remains competitive and the consumer is protected.

More or less, yes. Only detail is that the publishers actually got less money from both Apple and Amazon from ebooks, but as you say it's because they had other stakes like hardcovers that they wanted to protect. So bottom line remains that the publishers (at least expected to) make more money with this collusion.

The problem was that Amazon had a monopoly on e-book sales, and they tried to use it to price out the competition, prompting the collusion between Apple and the publishers. All of that is anti-competitive behavior and per se illegal. Yes, Apple and the publishers deserved to be brought to court. But the fact that the DOJ didn't bring suit against Amazon was total BS. The court made the assumption that lower prices are better for consumers, even at the expense of competition--which would then allow Amazon to charge higher prices.

What stands out in this case to me is the ease with which the deed was done! Imagine how difficult Apple's job would have been if there had been thousands of publishers to deal with instead of 5. Imagine how difficult it must be be for a writer now to negotiate a deal with a publisher now that there are only 5 who have the size and pull to get a work published. Once again, we have a case which screams out the evils of capitalism run amok. When markets are subverted by concentration, the consumer looses in almost every situation. Just look at the beer section of any large supermarket chain. Sort the beer by company... and weep... I for one like the new Amazon deal they have created for authors who want to bypass publishers. I have read a lot of good science fiction which would otherwise have ever seen the light of day (and a couple of stinkers... but for $1.99 I can live with "throwing it out"). I hope this model gains traction with all readers.

I largely agree with you, but the system worked in this situation. Five publishers should be enough for a competitive market. It wasn't and they all, with Apple's help, agreed to collude on prices. They were taken to court and found guilty under the current laws. Hopefully, the penalties are substantial enough that the next time, a corporation will think twice.

Maybe I'll get this wrong, but I'm trying to put this in easier terms to understand, for myself mostly.

Apple and Amazon both sell ebooks. Amazon want to speed the adoption of their ebook readers and, eventually, at this point, tablets, so they sell their ebooks at a lower price, making less of a profit, and encouraging people to read them on their Kindles. (They also sell their Kindles with little profit, but they use these to get people to buy stuff from their markets which is where they make money).

Publishers don't like that Amazon is selling the books at this price because people aren't buying their hardcover books, where they make a lot of their money.

Apple anticipates making a lot of money selling iPads, regardless of whether or not they sell books. They have a certain amount of profit they want to make on their ebooks, but they can't do this at the prices the publisher is charging for the books and the price Apple wants to sell them for. So, they get all the publishers together and they agree to put their books in pricing tiers and will pressure all other retailers to do the same. As long as they stay together, the publishers will make more money (less from Apple, but more from Amazon). Apple will sell books at the same price as Amazon and still maintain their profit margins, and Amazon will likely sell fewer Kindles and future tablets that will be advertised in their book store. It's a big win for Apple and the publishers. It effects Amazon's marketing strategy, but it's the consumer that really gets the shaft.

Do I have this right?This seems to be a cut and dry case of collusion. Government intervention is necessary in this situation to ensure the market remains competitive and the consumer is protected.

ebook customers get the shaft as far a pricing goes. There has been a real increase in the number of stores and ebooks that are available since this "deal" was made, so there is more variety.

However, as I pointed out earlier, non-ebook customers may be getting a benefit from this. You can't make a business of selling at cost or below, as Amazon was doing. As you pointed out, they were using ebooks and kindles as a way to sell more of their other goods. So people who buy the other goods are basically subsidizing the kindle and ebook customers. They are paying more for other items so that Amazon can discount ebooks and kindles.

Apple is interesting in protecting the 30% fee model for all content they resell. If the are not able to sell ebooks the same way they sell music, movies, and apps, then their whole ecosystem is at risk.

Publishers were less concerned about the actual profit they were getting on ebooks now. They were still getting paid the wholesale price, regardless of what Amazon sold it for. They were concerned that the $9.99 price point would become fixed, and in the long run they would have to lower the wholesale price to Amazon.

The problem was that Amazon had a monopoly on e-book sales, and they tried to use it to price out the competition, prompting the collusion between Apple and the publishers. All of that is anti-competitive behavior and per se illegal. Yes, Apple and the publishers deserved to be brought to court. But the fact that the DOJ didn't bring suit against Amazon was total BS. The court made the assumption that lower prices are better for consumers, even at the expense of competition--which would then allow Amazon to charge higher prices.

As I wrote in an earlier post, is it possible to provide some links to the articles that may actually have some solid numbers about this?

I am actually very curious to see just how profitable the ebooks division was before this all took place, and what methodology was used to reach this conclusion.

I've tried searching google, but have not had much luck with getting some real numbers about that division in Amazon.

There aren't published numbers. But the same DOJ that brought the case against apple actually started investigating amazon. They got to see the numbers and determined that amazon did nothing wrong, but had enough to go after apple. Also, loss leaders is not an illegal business practice. Colluding to set prices is.

As others have mentioned, that is an agreement between retailers. As an Amazon reseller, you can't run another retail page with cheaper prices for the same products. That is different from Apple's clause, which was between retailer and supplier and said the supplier's product can't be sold cheaper by any other retailer

I'm struggling to see the difference in the case when the seller happens to be the supplier.

For instance, Random House sells directly to Amazon. Does that not imply that RH cannot sell books anywhere else (online) for less than Amazon?

The accusation is collusion. Five publishers, which are supposed to be in competition with each other, instead agreed to raise prices in unison so customers would have no choice but to pay the extra five bucks a book, no matter what store they went to or what publisher they decided to buy from. They behaved as a cartel, with Apple as the ringleader.

Bingo. It's illegal for companies to agree together (collude, conspire, etc.) to fix market prices and conditions. Companies may not join together in a group (collude, conspire, etc.) to rout a competitor. The entire purpose of this unholy alliance was to force Amazon to raise its prices. Apple apparently, if you listen to Apple's attorneys, doesn't know anything at all about the publishing business, and it would normally be common sense for traditional book publishers to ignore a consumer electronics firm like Apple. But like the serpent in the Garden, Apple tempted them with the delicious fruit of higher prices (to support the higher prices in their brick and mortar stores) and they all bit down hard. Greed can make the smartest person dumber than a brick.

Who gives a fuck what company gets what, we, consumers, people like you and me, would end up paying more for eBooks because of Apple's illegal tactics. That's the whole point of this. Don't be so blind to your fanboyism and forget about ordinary people who would be paying up to 50% more for books because of Apple.

So would you support jail term for the perpetrator and his boss ?. In the Samsung Dram price fixing case, there was jail term for some of the execs .... here:

Interesting how uber Apple blogger John Gruber snidely comments on the guilty verdict

Gruber can be a little quick to defend Apple, but you're taking this out of context. He also said the ruling was a "cogent read." Cogent = convincing.

No, he changed his post and didn't mark that he'd done so.

I just went back into my rss reader, pulled up the read items, and here is his original post in full:

Quote:

Brian X. Chen and Julie Bosman, reporting for the NYT:

A federal judge on Wednesday found that Apple violated antitrust law in helping raise the retail price of e-books, saying the company “played a central role in facilitating and executing” a conspiracy with five big publishers.

“Without Apple’s orchestration of this conspiracy, it would not have succeeded as it did in the spring of 2010,” the judge, Denise L. Cote of United States District Court in Manhattan, said in her ruling. She said a trial for damages would follow.

Part of the evidence was this video shot by Kara Swisher of Steve Jobs speaking with Walt Mossberg in the hands-on press area after the introduction of the original iPad in 2010. Mossberg asks Jobs why someone would buy a book for $14.99 from the iBookstore when they could buy the same book from Amazon for $9.99.

Jobs: Well, that won’t be the case.

Mossberg: Meaning you won’t be $14.99, or they won’t be $9.99?

Jobs (smiling): The prices will be the same.

Judge Cote found that damning. No wonder Apple executives so seldom speak on the record.

(Pretty sure that’s me over Mossberg’s shoulder at the 1:45 mark.)

Methinks he detected some blowback and therefore made a stealth edit.

He added a sentence linking to the decision. Stealth edit, really?

Here we go again — why is this being downvoted? Yes, this is a genuine question. I'd appreciate if you waited to downvote me to oblivion until someone answers my question in a straightforward answer.

It's being downvoted because the debate about whether someone edited their post is completely and utterly irrelevant to this discussion. I wish I could downvote irrelevant stuff like this 20 or 30 times just to kill it.

Simple! Hardcover price minus printing cost, minus shipping cost, minus storage cost, minus hardcover used book value, minus any other cost not applicable to a digital file. I figure that comes to $0.99 or so.

Hey now, we have to give the author his/her cut! That probably hikes up the price to...$1.09

I think the paperback price is fair for an ebook. There's still additional work that has to be done to convert a text file into an ebook format -- especially if you want a nicely done ebook with hyperlinks and pictures, etc. There's no sense in driving the cost of ebooks down to the point where good authors won't publish in that format any more...

With that being said, there are always authors that I'll buy, even at full hardcover price -- Neal Stephenson, Neil Gaiman, Lois McMaster Bujold.

As others have mentioned, that is an agreement between retailers. As an Amazon reseller, you can't run another retail page with cheaper prices for the same products. That is different from Apple's clause, which was between retailer and supplier and said the supplier's product can't be sold cheaper by any other retailer

I'm struggling to see the difference in the case when the seller happens to be the supplier.

For instance, Random House sells directly to Amazon. Does that not imply that RH cannot sell books anywhere else (online) for less than Amazon?

If that is the case, how is this *effectively* any different?

If RH had an Amazon reseller contract, It would mean that RH cannot sell *direct to the consumer* at a price lower than the sale price Amazon sets. Probably not an issue, since all the publishers generally let the bookstores handle the final sale to the end user. Under the conventional wholesale/MFN agreement, RH might also sell books to B&N, and cannot charge B&N less than they charge Amazon. But Amazon and B&N could then set their sale price to consumers at whatever they wanted.

Amazon Reseller-ship isn't really intended for large suppliers that can easily sell goods themselves or negotiate contracts with those who can. It's good for smaller suppliers that don't have much exposure. Being listed on Amazon gives them that exposure - but they can't then undercut the Amazon price at their own website and hope people follow the product back there. They'd be using the exposure Amazon is giving them, without giving a fair cut to Amazon in exchange for it.

I really don't understand the perceived need for collusion by these publishers. Just like movies and music, books are not really in competition with other books in as much as price is concerned. People don't go around saying "I'm not buying The Lone Ranger on Blu-ray because Disney charges $4 more than Paramount charges for it's new Star Trek or Iron Man release." People mostly buy a book because it has a good summary or get's a good review.

No, they go around saying "I'm not buy The Lone Ranger on blu-ray because the movie was horrible".

Interesting how uber Apple blogger John Gruber snidely comments on the guilty verdict:

Quote:

Part of the evidence was this video shot by Kara Swisher of Steve Jobs speaking with Walt Mossberg in the hands-on press area after the introduction of the original iPad in 2010. Mossberg asks Jobs why someone would buy a book for $14.99 from the iBookstore when they could buy the same book from Amazon for $9.99.

" Jobs: Well, that won’t be the case.

Mossberg: Meaning you won’t be $14.99, or they won’t be $9.99?

Jobs (smiling): The prices will be the same. "

Judge Cote found that damning. No wonder Apple executives so seldom speak on the record.

So John, that's the reason, eh?

Jobs at the very least understood the market was going to head in that direction whether he gave the publisher the prices they wanted or not. I suspect he just let the time table advance to get his foot in the door instead of delaying the inevitable and being locked out. Despite the DOJ's assertions Apple isn't the ringleader. Despite the judge's assertions the price fixing was going to happen with or without Apple. Did Apple contribute to the issue... definitely. Did Apple cause it...definitely hot.

inevitable how, what part of this are you still not understanding? they were absolutely determined to be the direct cause, because they enabled this price fixing to be possible. without control over such a majority of their sales, publishers would not be able to influence the market through apple in such a way, and would not be able to strongarm amazon into playing ball. it doesn't matter what they intended to do, apple was the one who acted on it. it's not rocket surgery, I don't see what you get out of trying to justify these business practices.

publishers are powerless to save this dying medium, so there's no reason for you to play the victim for them or anyone else. those who mess with market forces should be dealt with swiftly and efficiently. of course they would rather stop time and keep gouging you for eternity, your job as a consumer is to show them why this is impossible, and remind them who they're working for.

E-books area dying medium?... there is a wrong statement if I've ever heard one. Print books maybe... if you count them going further and further niche until they're mostly only made for collectors and/or libraries. E-books are going to get more widespread for quite a long time,

As far as justifying, I call BS. Apple definitely contributed to the issue in the e-book market. They provided the publishers a tool which the publishers jumped on, in large part because Apple said we will provide a store where each of you can set your own prices for 30% of the sales figures. The publishers got to decided the prices themselves, much like they did with CDs, DVDs/Blu-rays, print books, video games, etc. Apple is being accused of being in charge setting everything down to even down the price. I'm sure as hell that there was a lot more price fixing and conspiracy of the nature described they've between the individual game device makers and the game publishers. Why else do you think PS3 & XB360 same start at $60 for their disks (as will PS4 & XB1 games) and Wii & Wii U start at $50 for their disks. That's the sort of price fixing that epitomizes what Apple was accused of, yet you don't see Microsoft, Sony, or Nintendo being sued for it.

You can't even limit the gouging of more affordable media to Apple and the e-book publishers. DVDs were technically cheaper to make than VHS tapes even with packaging changes yet they sold for more money... why because the publishers could do so. I suspect it happened before that many times as well.

If you want to call Apple on their crap policies fine, just address the similar and worse crap throughout the media industries while you are at it.

Where a vertical actor is alleged to have participated in an unlawful horizontal agreement, plaintiffs must demonstrate both that a horizontal conspiracy existed, and that the vertical player was a knowing participant in that agreement and facilitated the scheme.

"Horizontal" means between competitors. Apple is a "vertical actor" since they are a reseller. So if the publishers worked together to raise prices, which they pretty baldy stated they did, and Apple participated in that scheme, I'm not sure how they could be found not guilty. They were clearly a knowing participant in trying to increase the prices for books. So their only argument would be that they didn't facilitate the scheme, which isn't a point that anyone seems to be arguing?

When asked by a reporter later that day why people would pay $14.99 in the iBookstore to purchase an e-book that was selling at Amazon for $9.99, Jobs told a reporter, “Well, that won’t be the case.” When the reporter sought to clarify, “You mean you won’t be $14.99 or they won’t be $9.99?” Jobs paused, and with a knowing nod responded, “The price will be the same” and explained that “Publishers are actually withholding their books from Amazon because they are not happy.”

The import of Jobs’s statement was obvious. On January 29, the General Counsel of S&S [Simon & Schuster] wrote to [Simon & Schuster CEO Carolyn] Reidy that she “cannot believe that Jobs made the statement” and considered it “[i]ncredibly stupid.”

Yes it was an unfortunate statement - I watched the video of it today and Jobs seems to not understand the import of making such a statement. Who knows what he was thinking, but as an executive with a fiduciary duty to Apple, it appears he was either arrogant or incompetent and should have understood the raminfications of what he was doing.

For myself when can we expect refunds on any e-books bought through the iBookstore?

When asked by a reporter later that day why people would pay $14.99 in the iBookstore to purchase an e-book that was selling at Amazon for $9.99, Jobs told a reporter, “Well, that won’t be the case.” When the reporter sought to clarify, “You mean you won’t be $14.99 or they won’t be $9.99?” Jobs paused, and with a knowing nod responded, “The price will be the same” and explained that “Publishers are actually withholding their books from Amazon because they are not happy.”

The import of Jobs’s statement was obvious. On January 29, the General Counsel of S&S [Simon & Schuster] wrote to [Simon & Schuster CEO Carolyn] Reidy that she “cannot believe that Jobs made the statement” and considered it “[i]ncredibly stupid.”

Yes it was an unfortunate statement - I watched the video of it today and Jobs seems to not understand the import of making such a statement. Who knows what he was thinking, but as an executive with a fiduciary duty to Apple, it appears he was either arrogant or incompetent and should have understood the raminfications of what he was doing.

For myself when can we expect refunds on any e-books bought through the iBookstore?

I hate when it's implied that the take-away from these things is that people should keep their mouths shut. Why isn't the takeaway that people shouldn't break the law?

Interesting how uber Apple blogger John Gruber snidely comments on the guilty verdict:

Quote:

Part of the evidence was this video shot by Kara Swisher of Steve Jobs speaking with Walt Mossberg in the hands-on press area after the introduction of the original iPad in 2010. Mossberg asks Jobs why someone would buy a book for $14.99 from the iBookstore when they could buy the same book from Amazon for $9.99.

" Jobs: Well, that won’t be the case.

Mossberg: Meaning you won’t be $14.99, or they won’t be $9.99?

Jobs (smiling): The prices will be the same. "

Judge Cote found that damning. No wonder Apple executives so seldom speak on the record.

So John, that's the reason, eh?

Jobs at the very least understood the market was going to head in that direction whether he gave the publisher the prices they wanted or not. I suspect he just let the time table advance to get his foot in the door instead of delaying the inevitable and being locked out. Despite the DOJ's assertions Apple isn't the ringleader. Despite the judge's assertions the price fixing was going to happen with or without Apple. Did Apple contribute to the issue... definitely. Did Apple cause it...definitely hot.

inevitable how, what part of this are you still not understanding? they were absolutely determined to be the direct cause, because they enabled this price fixing to be possible. without control over such a majority of their sales, publishers would not be able to influence the market through apple in such a way, and would not be able to strongarm amazon into playing ball. it doesn't matter what they intended to do, apple was the one who acted on it. it's not rocket surgery, I don't see what you get out of trying to justify these business practices.

publishers are powerless to save this dying medium, so there's no reason for you to play the victim for them or anyone else. those who mess with market forces should be dealt with swiftly and efficiently. of course they would rather stop time and keep gouging you for eternity, your job as a consumer is to show them why this is impossible, and remind them who they're working for.

E-books area dying medium?... there is a wrong statement if I've ever heard one. Print books maybe... if you count them going further and further niche until they're mostly only made for collectors and/or libraries. E-books are going to get more widespread for quite a long time,

As far as justifying, I call BS. Apple definitely contributed to the issue in the e-book market. They provided the publishers a tool which the publishers jumped on, in large part because Apple said we will provide a store where each of you can set your own prices for 30% of the sales figures. The publishers got to decided the prices themselves, much like they did with CDs, DVDs/Blu-rays, print books, video games, etc. Apple is being accused of being in charge setting everything down to even down the price. I'm sure as hell that there was a lot more price fixing and conspiracy of the nature described they've between the individual game device makers and the game publishers. Why else do you think PS3 & XB360 same start at $60 for their disks (as will PS4 & XB1 games) and Wii & Wii U start at $50 for their disks. That's the sort of price fixing that epitomizes what Apple was accused of, yet you don't see Microsoft, Sony, or Nintendo being sued for it.

You can't even limit the gouging of more affordable media to Apple and the e-book publishers. DVDs were technically cheaper to make than VHS tapes even with packaging changes yet they sold for more money... why because the publishers could do so. I suspect it happened before that many times as well.

If you want to call Apple on their crap policies fine, just address the similar and worse crap throughout the media industries while you are at it.

not sure what your point is here, no amount of misrepresentation or misdirection or cherry picking is going to change what they did and who they did it with. this is an article about apple getting caught in bed with a bunch of publishers, trying to forcefully remove competition and prevent cannibalising their own brick and mortar sales. pointless references to video games or dvds or taking my comments out of context will not put them in any better light.

if your self image relies on this brand, you're just going to have to realise the fact that it has been tarnished with punishable offenses, that's all. no big deal, people just accept it and move on. there's really only so much we can cover at a time, so people like to stick with the topic at hand, which is apple being convicted of such a conspiracy. not sony or microsoft or what have you.